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This 1 Decision Will Shrink Your Social Security Checks By 30%

By Christy Bieber – Oct 14, 2021 at 5:00AM

Key Points

  • Social Security is a crucial income source for retirees.
  • You need to understand how Social Security works before you claim benefits.
  • If you shrink the size of your monthly checks, the reduction is likely to be permanent.

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You could end up with smaller checks for the rest of your life.

During retirement, it's crucial to make sure you have enough income to support yourself once you're no longer earning a paycheck. For most people, Social Security will play a crucial role in providing that support.

That's why it's so important to know that one specific decision could reduce your monthly benefits by 30%. Here's what it is. 

Two adults reviewing financial paperwork.

Image source: Getty Images.

This common move leads to a big reduction in monthly Social Security income

If you're turning 62 next year, you'll become eligible to claim Social Security retirement benefits for the first time. But if you make the decision to claim your benefits, you'll shrink the amount of your checks by 30%. This reduction is a permanent one. And it will happen to any future retiree who turns 62 in any subsequent years. 

The reason for this big benefits reduction is that Social Security designated a "full retirement age" (FRA) at which seniors get their standard benefit. FRA is based on birth year. And for anyone born in 1960 or later, FRA is 67 -- so seniors who reach age 62 in 2022 or beyond will have an FRA of 67. They must wait until then to avoid shrinking their benefits. 

If you claim even a month before full retirement age, you'll see your benefits reduced by:

  • 5/9 of 1% for each of the first 36 months.
  • 5/12 of 1% for each prior month.

When you do the math, claiming at 62 instead of 67 results in a whopping 30% reduction in monthly benefits. That means if you were slated to get around the average benefit of $1,544, you'd reduce your income by about $463 per month, or $5,558 per year. 

Does that mean claiming Social Security at 62 is the wrong choice?

So if you're turning 62 next year or beyond, does that mean you should avoid claiming Social Security benefits ASAP? Not necessarily. 

See, while you cut your benefits by 30% if you claim Social Security at age 62, you also start getting checks right away. If you wait beyond the first age of eligibility, you'll miss out on entire checks you otherwise could have had deposited in your bank account.

Many retirees end up better off, even with these missed checks. In fact, the optimal age for most people to claim benefits is actually later than full retirement age, at age 70. That's because retirees who wait earn delayed retirement credits that raise the amount of their check above their standard benefit.

Over time, funds lost by delaying are eventually recovered because of higher monthly checks resulting from avoiding early filing penalties and earning delayed retirement credits. If the checks keep coming once retirees break even, those who delayed end up with more lifetime income. Of course, not everyone lives long enough for that to happen.

If you're in poor health, claiming at 62 may be your best choice even with that 30% reduction in benefits. Ultimately, you need to consider the likelihood of outliving your life expectancy and make an informed choice about whether starting your checks ASAP is worth a big monthly income cut or whether you're better off waiting.

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